The outcomes of negotiations around preferences never seem to
have a compelling logic. Under a particular set of
circumstances is there a compelling reason why the A and B should
be equal (pari passu, as lawyers like to say) in the preference
stack or one (usually the B) should be ahead of the A? It
seems to me to be more determined by how eager to invest the new
money is (or how desperate to get a next round the old money
is). This "you get what you negotiate" situation
probably accounts for why there are a wide range of provisions out
there.
Having said that, there do seem to be some broad buckets that
the outcomes fall into.
An Up-Round Scenario
Let's look at a situation in which the B comes in at a
significant increase in valuation compared to the A. In this
situation, the valuation of the company starts off at a point
higher than that aggregate of the existing preferences. If
the company were to be sold in the following nanosecond, the B
would get
